The public announcements of historic profits by the oil companies, made with a meter over the course of this month, have left sustainability activists uneasy.
Petrobras closed the year 2021 with a record annual profit of R$ 106.6 billion; Galp Energia for 457 million euros; Shell of US$ 19.3 billion (R$ 96.7 billion); BP of US$ 12.8 billion (R$ 64.1 billion) and Russian Rosneft will pay the largest volume of dividends in its history.
The SPDR S&P Oil & Gas Exploration & Production ETF, an index that brings together the largest oil and gas companies, had an extraordinary performance of 67% in 2021. For those who are investors in fossil fuels, Carnival arrived early.
This spread of generalized profits, motivated by the rise in oil prices, should not, however, weaken the energy transition of these companies. For five reasons.
First, demand for oil is expected to plateau in up to 15 years, as renewable energy production advances and the efficiency of automotive batteries improves, as technology improves around new energy sources (such as green hydrogen or green kerosene), and that people’s environmental awareness is strengthened.
All this requires that oil companies prepare for decarbonization and, themselves, become mostly renewable energy companies. Therefore, most of them have already established commitments to net zero by 2040-2050 and announced obese investments in renewable energy. For that, resources are needed. Cash generated in 2021 will help.
Second, with the increasing requirement for listed lenders to report hundreds of data associated with their ESG practices, a new avenue for litigation will open up. After Exxon Mobil and Shell were the subject of heated lawsuits last year, the trend is for shareholders and NGOs to use the new public data to see if there is a discrepancy between the theory of what has been announced and the practice of what is delivered in the environmental and social area. The pressure of law will be greater than the pressure of morality.
Companies with lower environmental or social sustainability also have greater regulatory risk, as well as slower and more expensive adaptation to upcoming regulatory changes. Since 2000, oil companies have already paid US$53.4 billion (R$267.7 billion) in fines (Good Jobs First, 2022). Currently, as of February 2022, there are 2,545 climate laws and policies worldwide (LSE), 38 of which have been adopted in Brazil. The hands that push the backs of companies towards sustainability are also those of jurists.
Third, oil companies that neglect climate risks are companies with lower market value. A study by Schroders shows that oil and gas companies have the highest potential costs of insuring their assets against the impact of physical climate change. The value of these companies could fall by 4.5% if climate issues are not properly addressed.
Fourth, the cost of capital (debt and equity) of non-sustainable companies is higher – around 0.5% for energy companies. The academy has been consensual in this domain (eg Yasser Eliwa, Ahmed Aboud, Ahmed Saleh, 2021).
Finally, the recent volatility in the price of a barrel of oil, even though it has generated short-term profits, only signals that oil companies should adopt long-term strategies, more resilient to temporary nervousness. Oil and gas are not long-term investments. Low-carbon solutions, yes.
In this context, does Petrobras have reasons to celebrate? In the short term, yes. The market will react positively and the company’s management will be praised for its apparent competence. But Petrobras has shown difficulties in carving itself into a low-carbon company and in preparing for decarbonization.
The company’s new strategic plan for the five-year period from 2022 to 2026 expands the bet on fossils. Of a total investment estimated at US$ 68 billion (R$ 340.9 billion) for the period, 84% will go to oil exploration and production – an increase of 23% compared to the previous plan. Only US$ 1.8 billion (R$ 9 billion) will be invested in the decarbonization of its activity. In the opposite direction, the Portuguese company Galp, for example, announced a few months ago that it decided to abandon new oil and gas prospecting from 2022.
The company also announced that its strategy for transitioning to a low-carbon economy is based on the modernization of refineries to produce fuels with lower greenhouse gas emissions. Is very little.
Nor has it helped the governmental volatility with which Petrobras has been punished since its foundation in 1953. The company has already had 39 CEOs, that is, a new leader every 20 months. And only one woman.
Despite today’s announcement, long-term investors, who still have Petrobras in their portfolio, still have no reason to celebrate.
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
